Global Economics

Mongolia's Uneven Boom

The population of Mongolia's capital, Ulaanbaatar, has doubled in the past two years, giving rise to sprawling shantytowns

As Mongolia prepares for parliamentary elections on June 28, the resource-rich Central Asian country buzzes with campaign activity. On a sunny afternoon vans festooned with the banners and flags of the Democratic Party and Mongolian People’s Party careen through the potholed streets of Ulaanbaatar, loudspeakers blaring out the candidates’ virtues. Students march through the city center wearing T-shirts bearing the images of those vying for the 76 legislative seats.

Sitting in his ramshackle wooden home, Dorjsuren (many Mongolians use a single name), an unemployed plumber, bitterly dismisses the electoral spectacle. “Right now Mongolia is rushing to give away its land and resources to foreigners, and it makes me deeply angry,” says the resident of one of the capital’s sprawling slums, which are largely made up of round felt tents called gers. “Our government does nothing for the people while the rich just get richer.”

Endowed with some of the world’s largest reserves of gold, iron ore, copper, and coal, Mongolia has become a magnet for foreign money. The nation’s 10 biggest deposits are worth more than $1.3 trillion, according to estimates by Quam Asset Management. Yet anger is rising among the country’s 2.8 million people, close to one-third of whom still live in poverty. “The economic growth from the last few years hasn’t trickled down yet, and that is creating more social tension,” says candidate Sanjaasuren Oyun of the opposition Civil Will-Green Party. “Pressure for more populist policies is growing.”

In May lawmakers approved a new foreign investment law that requires parliamentary approval for deals in which overseas investors hold more than 49 percent of the equity and for transactions of more than $75 million in sectors deemed strategic, including media, telecommunications, banking, and, crucially, mining. The legislation was sparked in part by an attempt by the Aluminum Corporation of China (ACH) to purchase some mining assets (90 percent of Mongolia’s trade is with its neighbor China). “In Mongolia, there has always been concern about losing control of their resources to foreign countries,” says Peter Markey, who leads Ernst & Young’s China mining and metals practice.

Politicians have also proposed rewriting tax treaties that have allowed many foreign mining companies to limit their effective tax rate to close to zero. “We don’t want people to come in and clown around and escape with whatever hot profits they make, without contributing to the well-being of Mongolians,” says Vice Finance Minister Ganhuyag Chuluun Hutagt, speaking during a break between campaign stops in Ulaanbaatar.

The flood of foreign direct investment has sparked concerns of overheating: FDI totaled $5.3 billion last year in a country with a gross domestic product of $8.2 billion. Mining amounts to one-fifth of the economy and supplies a third of government revenue. The economy grew 17.3 percent last year, driven by a 56 percent surge in government spending, including cash handouts. The government largesse has stoked inflation: Food prices jumped 31 percent in April over the same month last year.

The rising populism is making business executives anxious. They say the investment law’s requirements on parliamentary approval could delay projects. “We have these possibly time-consuming hurdles that have to be crossed that could hurt the prospect of deals getting done,” says Jim Dwyer, executive director of the Business Council of Mongolia, an advocacy group for some 200 international and Mongolian businesses.

Mining companies are also alarmed by calls to renegotiate existing deals, including a massive $6 billion copper-and-gold mine that is managed and part-owned by the Anglo-Australian giant Rio Tinto (RIO). Some lawmakers want to boost the Mongolian government’s share in the mine, called Oyu Tolgoi, or Turquoise Hill. “Mongolia needs foreign expertise and foreign capital to help develop its resources, despite talk of resource nationalism,” says Cameron McRae, chief executive of Oyu Tolgoi. “The next step for Mongolia should be an informed, national-level conversation about how to use the profits from mining for the long-term benefit of the country.”

One big obstacle to a more equitable distribution of the proceeds from Mongolia’s mining boom is endemic corruption. Transparency International, an organization focused on graft, ranks Mongolia 120th out of the 183 nations it surveys. As an example of just how gothic the corruption can get, in April former President Nambaryn Enkhbayar was arrested on charges of enriching himself while in office and subsequently barred from participating in the upcoming election; the moves are seen by some as an attempt by the current administration to sideline a powerful rival rather than a good-faith effort to clean up government. “In my view, the former president’s jailing was to prevent him from running for parliament,” said California Senator Dianne Feinstein in a May 14 statement.

“What we are seeing now in Mongolia is not a real rule of law, but instead something that is common in many post-Soviet republics,” says Enkhbayar, who is free on bail. “The ruling party is trying to use the law and law enforcement agencies to get rid of its political opponents.” A pre-election opinion survey showed Enkhbayar as the most popular politician in the country, despite the charges against him.

Some 60 percent of Mongolians believe government policy is characterized by either “support for the rich” or “lack of concern for society at large,” according to a survey released on June 17 by the local Sant Maral Foundation. “There is an expectation that the next parliament will do something to reduce the gap between the rich and poor,” says Sumati Luvsandendev, executive director of the foundation. “I don’t expect any big uprising this summer. But the fall and winter are very difficult times here. It all depends on what steps the next government takes.”